Now that it's a $3.6 billion business with a firm grip on your TV, Sega wants to own the entire interactive entertainment industry.

By John Battelle with Bob Johnstone

Hayao Nakayama was puzzled. His newly hired American president wanted
to do the unthinkable: Launch a marketing campaign that directly
compared his company's breadwinner - the Sega Genesis game machine -
to its main rival, the Super Nintendo System.

"I don't understand," the director of Sega Enterprises said. The year
was 1991. Nintendo had just introduced its answer to the 16-bit
Genesis. But Sega had a two-year lead and was gaining market share in
the US. "Why do you want to do it that way?" Nakayama protested. "I
don't like it."

A Consumer Electronic Show attendee tries on the recently
announced Sega VR.

Tom Kalinske expected this. Since he joined Sega of America the year
before, the former president of Mattel had learned the reserve
peculiar to doing business as a Japanese company. In Japan, Kalinske
knew, direct comparisons just weren't done. Kalinske explained the
importance of aggressive marketing in the US, the biggest game market
in the world. If Sega was going to beat Nintendo, Kalinske counseled
Nakayama, we'd have to come out swinging and beat it in the US.

Nakayama turned that one over in his mind. There was nothing the
autocratic, single-minded competitor wanted to do more than beat
Nintendo. The multi-billion dollar company had redefined video gaming
with its 8-bit Nintendo Entertainment System, but had been slow to
react to Sega's 16-bit challenge. With downright maverick style for a
Japanese chairman, Nakayama delivered his decision. "It's your call,"
he told Kalinske. "That's why I hired you. Do what-ever you think is
right."

Tom Kalinske did, and two years later, Sega has won the West.
"Nakayama clearly understands that when in Rome, you should do as the
Romans do," says Shinobu Toyoda, executive vice president at Sega of
America who also serves as a liaison to Sega's home office in Tokyo.
"At Sega of America we have autonomy."

A Sega mega-arcade in Tokyo (100 more planned worldwide)

Sega now owns an estimated 45 percent of the US video game market
(Nintendo owns 44 percent) and more than 66 percent of the European
market, although it still lags Nintendo dramatically in Japan. Sega's
leading character, a restless hedgehog with places to go, has his own
cartoon show six days a week and is the most universally recognized
cartoon character in the US among young boys, third among all
characters only to Michael Jordan and Arnold Schwarzenegger. Sega
outsold Nintendo in the US last Christmas, and with new CD-ROM,
virtual reality, Activator and Menacer add-ons, Sega has become, in
the words of the real experts, two 15-year-old boys playing Mortal
Kombat in a San Francisco mall, "definitely the coolest system
around."

In an industry that loves to talk about razors (game units) and blades
(games), Sega is cutting it up in software sales as well. The Genesis
sells 1.2 to 1.4 units of software for every unit sold for Nintendo,
according to Bing Gordon, executive vice president at Electronic Arts,
which does a tidy US$200 million worth of annual sales to the Sega
market. "The Genesis has an older customer base than Nintendo," he
says, "and that's the growth market for the back half of the '90s."

Let's put it this way: If you bought US$10,000 worth of Sega stock
back in 1985, you'd be worth US$110,000 today. Since 1989, Sega has
more than quadrupled in size from more than US$800 million in annual
sales to an estimated US$3.6 billion this year. Once the laughable
purse dog of the video game world with barely ten percent of the US
market, Sega now clearly owns the fickle title of market leader, and
initial estimates for this year's holiday season predict a
continuation of that trend.

the opening screen to Scramble Training, a "ridefilm"
created for the Sega AS-1.

As the rest of world is slowly realizing, the video game industry is
bigger than the movies, more mass market than personal computers, and
poised to provide the first truly new form of entertainment delivered
through copper or coaxial since the invention of either the telephone
or the television. While the folks over at Nintendo, 3DO, and Atari
know that, Sega has been building its business on it for the past
three
years.

And as Gordon and other forward-looking businessfolk know, Sega's
plans for market domination don't end with capturing cultural cachet
among Western youth. Let Nintendo stay fat and happy as a video game
company catering to young kids whose cultural heroes include a dumpy,
industrial-age plumber. Now that two generations (don't forget the
Atari 2600, after all) demand more than inane sitcoms from their
televisions, Sega is prepping for the real battle. Just what does this
company of our children's streetwise banter want? This creator of
raucous, no-holds-barred advertising that, admit it, even makes
grown-ups laugh out loud? Now that Sega is a US$3.6 billion enterprise
with a firm grip on your television, where next are its sights set?

Nothing less than the whole interactive entertainment enchilada -
delivered through your cable or telephone lines, your Sega VR headset,
your next- generation Genesis box, and, should you care to actually go
somewhere, through myriad, networked Sega theme parks scattered across
the land. Five years from now, you (and your children, should you
decide to include them) could conceivably spend every
entertainment-bound dollar in your wallet on Sega-branded experiences
- television, "VRcades," games, even toys.

a still from a Sega CD advertisement

Tom Kalinske is looking forward to that day. "We want consumers to
spend their time and money with Sega entertainment when they're out of
the home and when they're inside the home," Kalinske proclaims. "We
want to provide entertainment that you'd rather do with us than any of
the alternative forms, whether it's network TV, local TV, whatever."

Just some of the developments coming to an Electronic Boutique near
you: Truly interactive game movies starring hot Hollywood stars (just
in time for Christmas); immersive 3-D game environments using cheap VR
technology (also out in time for Christmas); and motion-sensing
technology that places you directly into the game (the Activator
shipped this fall). Think about those three technologies working in
unison. Give them a year or two to mature, and mix in the Sega
interactive cable channel (coming next year from TCI and Time Warner).

As the adolescent clerk at Tower Records told me when I asked which
system - Sega or Nintendo - would be best for my toddling nephew: "If
he's under four, wait a coupla years and then get a Genesis. By then
it'll all be VR."

Welcome to the next level of entertainment. Fasten your seatbelts.

Mickey Mouse in a Box

Think of a traditional theme park. Acres of concrete walkways winding
through some nutty genius's carefully manicured personal fantasy. But
Walt Disney is dead. Long live Douglas Trumball. The creation of
Luxor, a multimedia theme park cum casino, replete with
state-of-the-art Sega arcade (see Wired 1.5, page 66), further
solidifies the basic assumption behind Sega's business: Entertainment
and leisure are going interactive. With the right setup
(floor-to-ceiling screens, a motion-based platform, and a few Crimson
Reality Engines cranking out hi-res images), you can take Disneyland
and cram it into a pod about the size of a Dodge Caravan. Sega has,
and it's called the AS-1, installed now in major theme parks but
coming soon to a mall near you. Take the AS-1 concept and expand it -
a theatre-sized AS-1 running a roller coaster simulation, a personal
AS-1 running a demolition derby simulation (linked to 25 or so others
running the same derby across the country). Toss in a few hot dog
stands, a whizzy central plaza, and some merchandising operations and
you have the basis for some pretty profitable theme parks. Certainly
Sega has competitors in this new field - St. Louis-based Edison
Brothers and Chicago-based Virtual World Entertainment among them -
but successful as these companies might be, they don't have Sega's
plans, and they don't have Sega's money.

a scene from Megalopolis , another AS-1 ride.

Over the course of the next five years, Sega plans to open more than
100 of these VRcades worldwide. Each will cost from US$10-$50 million
to build, but think of the revenue they'll create: As Luxor effects
wizard Trumball points out, people will stand in line for an hour and
pay US$15 for a five- minute experience. It just has to be the
right
experience.

The United States's US$6-billion-a-year theme park industry may be
growing at a tepid rate of 5 percent, but Sega knows the experience
business. It's been providing experiences to more than 1,200 video
arcades across Japan, where many of its high-resolution games first
appear before they are transitioned to the home market. It is here, in
the arcades, that Sega introduced Virtual Racing, a wildly successful
racing pod and precursor to the personal AS-1 described above. In the
past year, Sega has expanded into Taiwan and Europe, and amusement
center income grew from US$311 million to US$506 million. Sega also
raked in US$502 million on sales of its arcade machines to third-party
amusement centers.

The arcade business gives Sega more than a billion-dollar revenue
stream. It also serves as a research and development laboratory. "We
look at it as a continuum of experience," says Doug Glen, group vice
president of business development and strategic planning for Sega of
America. "You can leverage the asset from the highest end down to the
mass-market - the home. We get into the leading edge and nurture the
experience throughout its various manifestations."

Does that mean we'll someday have an AS-1 in the home?

"Beyond the shadow of a doubt," he asserts.

Given Sega's aggressive plan to storm the US market, was it pure
coincidence that on the Fourth of July The New York Times devoted half
of the front page of its business section to a photo of Nakayama,
smiling atop Sega's AS-1, the headline proclaiming: "Sega Takes Aim at
Disney's World"? Mickey is probably shaking in his buttonless boots.

How Did They Do It?

Sega may be aiming for Disney's world, but the company is no Disney.
It wants to be bigger than Disney (and its employees are allowed to
wear their hair long and sport beards, if it means they program
faster.)

Founded in 1954 by David Rosen, an American entrepreneur who is still
active at Sega (as co-chairman of Sega of America), Sega was a US
company before it became a Japanese one.

Coming out of the Air Force after a tour of duty in Tokyo, the
20-year-old Brooklyn native saw that Japanese people needed lots of ID
photographs, but that local photo studios were slow and expensive. To
cater to this need, he established Rosen Enterprises and went into the
instant photo booth business. The booths were a big success, growing
quickly into a nationwide chain. More significantly, Rosen established
relationships with theaters and department stores that would later
prove crucial in getting his next business off the ground.

In 1957, the Korean War had just ended and Japan's economy was
starting to boom - for the first time the Japanese had some disposable
income. To Rosen, this meant the time was ripe to get into
entertainment. The vehicle that he chose - arcade games - were unknown
in Japan. Rosen headed for Chicago, headquarters of many of the
world's largest makers of arcade games. Reasoning that there was no
point in putting the latest products in front of an unsophisticated
market, he shrewdly invested in used games. Japanese theaters and
department stores gave him space to operate, and within a few years
Rosen had established some 200 arcades nationwide. In those days, his
only competition came from Service Games (or SeGa), another
American-owned firm whose original business was jukeboxes and fruit
machines.

From Rosen's point of view, the most interesting thing about his
rival was that they had a factory, and he needed the ability to
manufacture. By the early 1960s, the Japanese arcade market had caught
up with the US. The problem was that games makers had nothing new to
offer, they were merely making cosmetic changes to old games. "We had
to have design and manufacturing of new products for our operation,"
Rosen recalls. In 1965, the two companies merged to form Sega
Enterprises, a Japanese company, with Rosen as CEO.

Rosen designed the company's first game himself. In Periscope, the
object was to "sink" chain-mounted cardboard ships. You lined the
targets up in the sights of the submarine's periscope, then pressed a
button to fire "torpedoes" - represented by lines of colored lights -
at them. Crude by today's standards, but Periscope was a big hit. Its
fame spread to arcade operators elsewhere, who traveled to Japan to
see the game. Sega exported Periscope to Europe and the US, where it
became the first 25-cent game (all previous arcade games cost either a
nickel or a dime). Encouraged by this success, Sega followed up with a
series of other games, all using the latest electronic technology. "We
were doing lots of things that hadn't been done before," Rosen
recalls, "like adding sound and special effects." State-of-the-art
technology became, and still is, the company's
trademark.

The One That Got Away

By the late '60s, Rosen decided to take Sega public, but for an
American to do that in Japan would have been unprecedented. He was
advised that going public in the US would be easier. In the hunt for a
US-based partner, Rosen settled on Gulf + Western, which purchased
Sega outright in 1969. G+W took its acquisition public in 1974,
leaving Sega Japan as a subsidiary. Hayao Nakayama, a former Sega
distributor, was drafted as the subsidiary's president.

During the late '70s and early '80s, the game industry - which with
the arrival of Atari now included a consumer segment - went through a
huge boom followed by a catastrophic bust. Wondering what to do with
its apparently worthless Japanese property, Gulf + Western turned to
Nakayama, who, anxious to move Sega into the consumer marketplace,
suggested a management buy-out. This was arranged, and with financial
backing from CSK, a leading Japanese software house, in 1984 Sega
became a Japanese company once again for the paltry price of US$38
million.

(Gulf + Western's other entertainment property, Paramount, was
retained, and G+W later took the Paramount name as its own. Like most
other studios, Paramount is scrambling to get into interactive
software. The movie business is flat: Last year Paramount posted sales
of US$4.6 billion, but only US$285 million in profits. Just for
comparison's sake, in the same period ex-subsidiary Sega posted
profits of US$817 million on US$3.6 billion in sales. As Homer Simpson
might say, were he a Paramount executive instead of a character in
several hot-selling Sega games, dooooh!)

Left to fend for itself in an increasingly competitive industry, Sega
was stunned by the huge success of Nintendo's original, 8-bit
Entertainment System, which shipped in 1985. In Japan, where Nintendo
has locked in software developers, distributors, and retailers, Sega
has never really recovered. But in the more open markets of Europe and
the US, it has been quite a different story.

Deborah Harry on the set of Switch (a working title for the
recent Sega CD release.

In Europe, Sega beat Nintendo to market with both 8- and 16-bit
machines. Until this year, when it was eclipsed by Sega of America,
Sega Europe accounted for the largest share of the company's consumer
revenues. In the US, Sega lost the 8-bit battle, then fought back with
the Genesis, introduced at the Las Vegas Consumer Electronics Show in
June 1989. At first, Rosen recalls, it was an uphill struggle to
persuade people that there was an appreciable difference between 8-bit
and 16-bit machines. Nintendo, predictably, tried to convince the
world that the Genesis was unnecessary. Sega's archrival produced a
video that showed a hot-air balloon marked "16-bit" being punctured by
a pin-wielding Super Mario. But in clinging to outmoded technology,
Nintendo made a serious blunder.

"The giant went to sleep for two years," says Bishop Cheen, senior
analyst with Kagan Associates in Carmel, California. "They woke up and
it was too late."

The Kyoto-based Nintendo gave Sega a precious headstart in the next-
generation marketplace. This in turn gave developers time to gain
familiarity with the Sega machine.

One such developer, who had a passel of hits on Nintendo's 8-bit
platform and had recently signed several stars to software licensing
deals, recounts an introductory dinner he had with Nakayama directly
after the Genesis launch in 1989. The developer told Nakayama that his
company was interested in porting its hit games over to Sega. Both he
and Nakayama knew this was potential suicide: At the time, Nintendo
forced all of its developers to sign non-competition agreements;
breaking them meant losing Nintendo's license.

"Nakayama turned to me," the developer recalls, "and said, 'Not yet.
Right now you have more to gain by staying loyal to Nintendo until we
grow our hardware base. Then you can come over.'" It was typical
Nakayama business savvy - keep your cards close to the vest until
playing them has the most dramatic impact.

In 1990, under pressure from Congress, the DOJ, and several lawsuits,
Nintendo rescinded its exclusivity requirements. The developer, who
still prefers to be anonymous, is now making a killing in the Sega
market.

a child reacts with glee when Sonic appears at a recent AIDS
awareness
benefit.

By the time the 16-bit Super Nintendo Entertainment System was
launched in August 1991 - six months earlier than originally intended
- games for the Genesis were already into their second and third
generations, and the Genesis itself had sold more than a million
units. At the same time, Sega of America came on strong with the
aggressive marketing campaign blessed by Nakayama and engineered by
Kalinske. The campaign's theme, "arcade entertainment for the home,"
drew directly on Sega's roots. The comparative ads graphically touted
the superiority of Sega's machines. Genesis became the cool machine to
own, the one big brother played with. In schoolyards across America,
Nintendo was relegated to younger kids. "Nintendo too narrowly defined
its market to be 8- to 14- year-old boys," says Steve Eskenazi, senior
analyst with Alex Brown & Sons in New York. "Sega said forget that,
we're going to target the older crowd. It captured the high ground."

The Window of Opportunity
In a nondescript ballroom early last year at the Redwood City,
California Holiday Inn, the Goodby, Berlin & Silverstein advertising
agency was engaged in a US$45 million gamble. The tacky,
velvet-curtained room had been transformed into a combination stadium
and stage. With a sound system provided by the same folks who do Dead
concerts, the agency's entire staff sat in festooned bleachers,
cheering and playing Sega video games rigged to towering walls of
video monitors. It was quite a spectacle, and the twenty or so Sega
executives sitting at mid-field were clearly impressed.

Goodby was looking to win the Sega account, which Sega had put up for
review. Instead of presenting a standard pitch - the numbers, the
market research, the pie charts - Goodby decided to have some fun.
That was, after all, the whole point of Sega's business. Sega bit;
Goodby won the account.

Associate Planning Director Irina Heirakuji spent months in the
bedrooms, living rooms, and homes of America's youth, filming what
kids wanted, what kids said, and why kids thought Sega was cool. She
found that while most were married to the 8-bit NES system, they
lusted in their hearts for Sega. "There was this base level of
dissatisfaction with Nintendo," she says. "Not many kids had Sega, but
they went to the homes of those that did."

With momentum in the US and clear market dominance in Europe, 1992
became the year Sega went for Nintendo's jugular.

"We knew that we would have to make Sega a cultural phenomenon if we
were going to beat Nintendo," Heirakuji says. "We told Sega, 'OK, if
you're going to bust it, now's the time, because Nintendo is starting
to react.' "

Goodby produced 35 commercials in less than four months, the first of
which debuted not during Saturday morning cartoons, but on the MTV
Music Awards. "We had a window of opportunity (leading up to Christmas
1992)," says Greg Stern, account director for the Sega account. "Kids
don't want to see the same commercial over and over again. We focused
on new games and branding the Sega image."

Heirakuji's research and the frenetic ads that sprung from it captured
the post-MTV mores of a culture hooked on visual images, an impatient
culture that absorbs and processes information literally in four-frame
riffs. In schoolyards, living rooms, workplaces, even in bars and
other "grown-up" venues, perfectly normal folk might look at each
other, pause for a pregnant second, then exclaim with lunatic eyes:
SEGA!

And Sega became cool because Sega took chances with mass-media-defined
morality. When Acclaim Entertainment released its bloody Mortal
Kombat game in September, the Sega version let you rip off heads and
tear out hearts. The Nintendo version was sanitized. Sega's version
outsold Nintendo two to one. (In an unusual twist, Mortal Kombat, the
movie, is now in the planning stages. No word on if it will be "R" or
"PG" rated.)

The folks at Goodby Berlin are particularly proud of a current spot
for Sega's Game Gear portable that pokes fun at Nintendo's monochrome
GameBoy portable. "Some people are content to be entertained by
simple one-color electronics," an announcer intones as we watch a
family of porch-sitting Southern stereotypes chuckle idiotically as a
bug-zapper methodically wastes hapless insects. "Somehow these people
have just never heard of Game Gear, the multicolor portable from Sega
with tons of new titles. Yeah, some people are like that. But then
some people like to eat pickled pork lips too."

Thereupon, the father of the family, who bears a striking resemblance
to Homer Simpson's beer-guzzling friend Barney, slurps up a fistful of
pig lips, a gross factor of ten-plus, and a big hit with kids looking
for something to talk about at school
tomorrow.

Sega of America

Sega's phenomenal growth over the past three years can be directly
mapped to the stunning growth of its largest division, Sega of
America. From a staff of 35 in 1989, Sega of America has shot up to
its present strength of close to 700 today. "In the early days I
likened it to a start-up company with money," says Clyde Grossman,
former group director of product development at Sega, now VP of
publishing for Spectrum Holobyte. "It seems like we were constantly
hiring - we'd put procedures into place, and then we'd outgrow them."

In two years, according to Ellen Beth Van Buskirk, director of
marketing services, Sega of America has become the largest producer of
video games in the world.

Here, among the stark, functional office parks of Redwood City,
California, Sega creates the lion's share of the software sold for the
Genesis in America and Europe. Here Sega has established its
multimedia studio, charged with creating compelling next-generation
software that will turn Sega's CD player into a must-have peripheral.
Here also is the Sega Technical Institute, a games shop so secret,
product managers are not allowed inside to see how the latest versions
are coming along.

Wandering among these cluttered hallways, inflatable Jurassic dinos
spilling out of equipment-packed cubicles, I can't help but conclude
that this place holds the collective dreams of the Atari generation, a
generation that either built or grew up with the first wave of video
games, lost interest, and is now spending well near all its time
trying to find the magic again. As I walk past a Silicon Graphics
Indigo rendering a raptor for the Jurassic Park CD, I realize that
these people aren't making games for the kids, they're making games
for themselves. The kids are just the lucky initial target market.
Here in the multimedia studio, programmers, musicians, filmmakers, and
animators are working toward the day when they can create games so
sophisticated that playing them will seem about as unusual as going to
the movies.

"The (video game) industry has been through several cycles, but it's
at the point now where it is clearly going to be here for good, in a
real, tangible form," says Joe Miller, who as VP of product
development is responsible for all of SOA's development efforts. "It
is now a matter of how the industry evolves as a whole."

Two crucial indicators of that evolution are the Sega Channel and The
Edge 16, both alliance-driven ventures that dramatically extend the
purpose and potential of Sega's Genesis. Both extend gameplay outside
the home, the former through coaxial cable lines, the latter through
the copper telephone wire. In the looming turf battle for on-ramps to
the information superhighway, Sega is covering all the bases.

The Sega Channel is a joint venture between Time Warner,
Telecommunications Inc. (TCI), and Sega that will make a library of
Sega titles available for download to the Genesis through most basic
cable systems (you'll pay a premium for the service, prices have not
been set). All you need is a special "tuner/ decoder" cartridge that
tunes in the channel, pops up a menu, and downloads your choice. The
channel will offer test drives of new games, but they'll be hobbled:
You can only get to the third level, for example. If you want to get
to the fourth, you have to buy the game.

"We have built this tremendously valuable asset with a huge installed
base, so you try to figure out more ways to put it to work for you,"
says Doug Glen. "On an informal basis, we've found that the most
powerful marketing technique is the rental and borrowing grapevine.
The majority of gameplayers try a game before they buy it. Kids spend
more time thinking about the next game they are going to buy than an
adult spends before buying a car."

Sega also plans to use the channel as a means of dipping its toes into
the untested waters of cable-based interactive services. "There are
going to be so many services in the future that it will be confusing
to the consumer," says President Tom Kalinske. To be sure, he admits,
the Sega Channel "could be a major source of revenue for us." But he
is cautious: "We want to make sure that we do this correctly. We'll
learn a lot about how people want to interact with a service that is
downloaded."

To learn the business of interactive services, Sega turned to AT&T and
PF Magic, a San Francisco-based multimedia development company. Due in
summer 1994, The Edge 16 is a Genesis peripheral that captures a
gamer's joystick movements and transmits them via phone lines to any
similarly equipped Genesis machine. Think of it as ISDN meets Sonic
the Hedgehog. The Edge will also allow voice connections, so gamers
can hear each other yip and yowl as they
compete.

The Edge is much more than a Sega modem. It includes four slots for
"enhanced game play," double the onboard RAM of the Genesis, and
"special ports for the addition of a keyboard, as well as future
expansion upgrades," according to AT&T's press release. In other
words, The Edge, which will retail for about US$150, is AT&T's bid for
the home telecomputer market. And it's Sega, not Nintendo, that AT&T
is betting will take it there.

From Game Box to Highway On-ramp

"CD is the future of the business," says Peter Dille, director of
marketing for Sony Imagesoft, a major producer of Sega CD titles.
"It's the only game in town."

It was Sega of America that breathed life into the Sega CD, probably
Sega's riskiest, and smartest, new platform to date. While the massive
storage capabilities of CD-ROM allow the US$229 Sega CD to produce
near-television- quality video and red-book audio, the Genesis to
which it is connected can only throw so much data to the screen at any
given time. First-generation games for the Sega CD, such as Sewer
Shark or Night Trap, lacked the impulsive, real-time qualities that
sold 4.5 million units of Sonic the Hedgehog 2 (at US$50 a pop - you
do the math).

Nintendo knew this, and, as befits its conservative tradition, decided
to stall its previously announced plans for a CD player (it still
won't commit to CD, even for its recently announced Project Reality
platform due in 1995). In equally typical fashion, Sega seized the
initiative and brought its player to market in early 1992. Although
the player has sold a modest 250,000 units, slow sales have been more
than offset by the cachet the unit has brought to Sega's image.

"We looked at Sega's CD product and we said 'this is not very good,'"
said George Harrison, director of marketing and corporate
communications for Nintendo. "But when we talked to kids - who didn't
know anything about it - they thought it was the world's greatest
thing. It gave Sega a real halo."

Sega hopes to polish that halo with the next generation of recently
released CD games, which include a 3-D version of Sonic the Hedgehog;
a film noir, first-person boxing title called Prizefighter (Sega hired
200 extras to play the characters and audience); Ground Zero Texas, a
US$3 million production replete with invading aliens and other B-movie
regalia; and Switch (a working title), an interactive movie with name
talent and a diabolically complicated plot (see On the Set, page 129).

And it doesn't stop there: Next year Sega plans to introduce a 32-bit
CD- ROM-based machine code-named Saturn. Priced at around US$500, it
will compare favorably to the 3DO multiplayer and, unlike 3DO, it will
bring an installed base of 12-15 million Sega fanatics along for the
ride. And you can bet it will talk to your cable TV service.

"Once kids start interacting with live video," asserts Tom Zito,
president of Digital Pictures, which produced many of Sega's hit
CD-ROM titles, "they'll never go back."

But whose live video? When it comes to interactive entertainment, Sega
is not the only game in town. A stampede of companies, from Prodigy to
Silicon Graphics, are lining up at the information highway feed
trough, and while Sega is at the top of its field right now, at least
two companies - 3DO and Nintendo - are poised to strike back
immediately.

"I think it is still a horse race," says Judith Lange, executive vice
president at Crystal Dynamics, a software company that released the
first title for the 3DO machine. Lange, who once worked in sales at
Sega, says her company will consider making software for Sega when
Saturn ships next year.

In the meantime, 3DO has shipped its US$700 "multiplayer," although in
quantities that Nintendo's Harrison finds unremarkable. "They plan to
sell about the same number (of CD-ROMs) in a whole year as we sell
Super Nintendo units in one weekend," he says. "We are more than happy
to have someone pioneer a market, then fail; then we can step in."

Nintendo isn't sitting on its hands, Harrison says, but its Project
Reality, a joint venture with Silicon Graphics that will bring 64-bit
Nintendo to the masses in 1995, hasn't set the game world on fire. If
Nintendo doesn't come up with something between now and then, it could
see its already eroding market share washed away. Chances are that
something new will be a CD player. A prototype, based on Sony
technology, reportedly awaits a nod from Nintendo's
conservative
management.

Next to Nintendo or 3DO, Sega's toughest competitor may turn out to be
Sega. In interactive entertainment, you're only as good as your
software. Since Sega now makes 50 percent of its own software, it
regularly competes with its own developers for market share, says Lee
Isgur, a partner with Volpe Welty & Co. in San Francisco. Both Acclaim
and Activision bid for the rights to produce Jurassic Park on Genesis,
but they lost to Sega. "If a 3DO or an Atari Jaguar can legitimately
establish itself, and they won't be a competitor (in terms of
software), you could see third-party support shift to the new guy on
the block," he says. "That's how Sega established itself against
Nintendo."

Tom Zito says his company could have done a 3DO version of
Prizefighter, but Sega would not allow it. "They considered
Prizefighter to be a killer app, and they wanted it to be available
only on their machine," he says. "The point is: 'If you want to play
this game, you gotta buy Sega CD.' " Zito's Night Trap, one of the
original interactive movies for Sega CD, is now available for 3DO.

So how will Sega stay on top in a fickle market where the next Sonic
blockbuster could find itself playing on a competitor's machine?
Diversity, says VP of development Joe Miller. With a cable channel, a
billion-dollar arcade business, peripherals like the Edge and VR
helmets, and an eighteen- month lead in the CD-ROM business, Sega
plans to dominate the world's interactive entertainment industry by
the sheer force of diversity.

"If someone told me years ago that they had an idea for a game based
on a blue hedgehog, I am not so sure that I would be that excited,"
Miller says, putting a contextual spin on Sega's success. "If Disney
had stopped with Mickey, it'd be a pretty dull place."

On the Set

Sega SIDEBAR Sega SIDEBAR Sega SIDEBAR Sega
Studio five on the Hollywood Center film lot is roughly the size of a
high school gymnasium. For the filming of Switch (a working title),
studio five has been transformed into a disjointed Egyptian mansion,
built by an eclectic (and now dead) archaeologist. In the final Sega
CD product, the game player attempts to outsmart the building's new
tenants in a search for an ancient Egyptian treasure hidden somewhere
in the structure.

With all the accoutrements of a major movie production - the
scaffolding, the black curtains, the gophers and grips and extras
tugging at elaborate costumes - it's hard to believe I am watching the
creation of a video game. Each room in the "mansion" is rigged with
byzantine traps that the game player must defuse, avoid, or fall
victim to.

Deborah "Blondie" Harry, her size-six frame squeezed into a size-four
Cleopatra-meets-the-diva dress, is smoking a cigarette and acting like
a perfect star, pain-fully bored with all of this. Two more days and
the shoot is over. Up ambles 16-year-old Corey Haim, of Lost Boys and
Stand by Me fame. Haim just finished shooting a scene where he becomes
a human pinball in an elaborate set of Egyptian columns. He plays the
bad guy in this film, the one you must confront to win. Haim bums a
light from Blondie and watches the crew prepare for the next shoot.
Blondie may see shooting one of the first-ever interactive game movies
as just another job, but Corey Haim hears the ever-strengthening
heartbeat of a new promotional medium. For Haim, shooting Switch is a
chance to be a Segastar. He's positively smitten with the
possibilities.

"Sega is definitely where it's happening," Haim says, then drags on
his Marlboro. "I mean, like I have some plans with this company."

"Plans?" I ask.

"Yeah, man. Like have you seen their ads? Far fuckin' out. I want to
be in them. I want to be, like, the Sega boy."

Haim's eyes grow distant with the thought of starring in his very own
Sega commercial. Forget the fact that his mug will be spinning on
hundreds of thousands of Sega CDs across the land. To be the Sega boy
- far fuckin'
out.

Sega FACTS Sega FACTS Sega FACTS Sega

Size of US video game market: US$5.3 billion
Size of US movie market: US$5 billion
Size of US theme park market: US$6 billion
Percentage of homes with boys age 8-16 with game machines: 80
Sega gross sales in 1989: US$813 million In 1993: US$3.6 billion
Nintendo gross sales in 1989: US$2.7 billion In 1993: US$4.3 billion
Disney gross sales in 1992: US$7.5 billion
Number of Genesis systems installed in 1991: 1 million In 1993 (est.): 12
million
Average price of a movie ticket: US$5
Average price of a videogame: US$50
Percentage of Sega employees in R&D: 40
Number of Sega CD units sold by 9/93: 250,000 Number Sega expects to sell by
1/94: 1 million
Average age of person playing Electronic Arts's Sega games: 20
Average age of person playing Electronic Arts's Nintendo games: 13
Size, in square feet, of Sega's 1986 booth at the Consumer Electronics Show:
1,800
In 1993: 39,000
Processor in Apple's original Macintosh computer: Motorola 68000
Processor in Sega's original Genesis machine: Motorola 68000
Sources: NPD Inc., Entertainment Data Inc., Sega, Alex Brown & Associates,
Electronic Arts, Amusement Business, Disney, Nintendo